the atad directives - taxand€¦ · (atad 1), as amended by eu directive 2017/952 (atad 2, atad...

A EUROPEAN FOCUS ON INTEREST EXPENSE DEDUCTIBILITY AND HYBRID MISMATCHES

THE ATAD DIRECTIVES:

JULY 2020

FOREWORD 1

1. ATAD DIRECTIVES & THEIR IMPLEMENTATION IN ITALY: AN INTERNATIONAL APPROACH 3

1.1 BACKGROUND: A BRIEF SUMMARY ABOUT EU LAW INSTITUTIONAL FRAMEWORK 3

1.2 ATAD AND TAXATION OF INTEREST: RATIONALE IN THE INITIAL STATEMENTS 3

1.3 FOCUS ON THE “SAFE HARBOUR” RULE (WHICH ITALY DID NOT EXECUTE) 4

1.4 DEDUCTION OF INTEREST EXPENSE BY COMPANIES: WHAT ABOUT PARTNERSHIPS? 6

1.5 CONCLUSIONS 7

2 ITALIAN IMPLEMENTATION OF THE ATAD INTEREST LIMITATION RULE 8

2.1 INTRODUCTION 8

2.2 GENERAL RULE 8

2.3 THE DEFINITION OF INTEREST EXPENSES AND REVENUES 9

2.4 THE DETERMINATION OF THE EBITDA 13

2.5 THE EXCLUSION OF PROJECT FINANCING 14

2.6 DEDUCTIBILITY OF INTERESTEXPENSES IN CASE OF TAX CONSOLIDATION 15

2.7 REAL ESTATE COMPANY 15

2.8 BANKS AND INSURANCE COMPANIES 17

3 ITALIAN IMPLEMENTATION OF THE ATAD ANTI-HYBRID RULES 19

3.1 SCOPE OF ITALIAN ANTI-HYBRID RULES 20

3.2 ITALIAN ANTI-HYBRID RULES 22

3.3 EXCLUSIONS FROM ITALIAN ANTI-HYBRID RULES 22

3.4 ROLE OF ITALY IN APPLYING ITALIAN ANTI-HYBRID RULES 22

3.5 HYBRID MISMATCHES COVERED BY ITALIAN ANTI-HYBRID RULES 22

3.6 IMPACT OF ITALIAN ANTI-HYBRID RULES ON INVESTMENT FUNDS 36

3.7 CONCLUSIONS 36

4 SPANISH IMPLEMENTATION OF THE INTEREST LIMITATION RULE 37

4.1 INTRODUCTION 37

4.2 GENERAL RULE 37


4.4 THE DETERMINATION OF THE “OPERATIONAL PROFIT” 38

4.5 THE ANTI-LBO RULE 39

4.6 DEDUCTIBILITY OF INTEREST EXPENSES IN CASE OF TAX CONSOLIDATION 39

4.7 SOCIMI COMPANIES 39


4.9 THE INTEREST BARRIER RULE AS A TIMING LIMITATION 40

4.10 SPECIFIC ASPECTS OF THE IMPLEMENTATION OF ATAD 40

5 SPANISH IMPLEMENTATION OF THE ANTI-HYBRID RULES 41

5.1 DIVIDEND PAYMENT 41

5.2 PROFIT PARTICIPATING LOANS AND EQUITY/DEBT HYBRID INSTRUMENTS 42

5.3 HYBRID PAYMENTS 42

5.4 SECURITIES LENDING 42

5.5 LOSSES FROM PERMANENT ESTABLISHMENTS 42

6 LUXEMBOURG’S IMPLEMENTATION OF THE ATAD INTEREST LIMITATION RULE 44

6.1 INTRODUCTION 44

6.2 GENERAL RULE 44


6.4 THE DETERMINATION OF THE EBITDA 46

6.5 THE EXCLUSION OF PROJECT FINANCING 47


6.7 GRAND FATHERING CLAUSE 49

6.8 REAL ESTATE COMPANY 50


7 LUXEMBOURG IMPLEMENTATION OF THE ATAD ANTI-HYBRID RULES 51

7.1 SCOPE OF LUXEMBOURG ANTI-HYBRID RULES 51

7.1.2 OBJECTIVE SCOPE 57

7.1.3 TERRITORIAL SCOPE 57

7.2 LUXEMBOURG ANTI-HYBRID RULES 57

7.3 EXCLUSIONS FROM LUXEMBOURG ANTI-HYBRID RULES 58

7.4 ROLE OF LUXEMBOURG IN APPLYING LUXEMBOURG ANTI-HYBRID RULES 60

7.5 HYBRID MISMATCHES COVERED BY LUXEMBOURG ANTI-HYBRID RULES 60

8 GERMAN IMPLEMENTATION OF THE ATAD INTEREST LIMITATION RULE 78

8.1 INTRODUCTION 78

8.2 DETERMINATION OF “INTEREST EXPENSE” 78

8.3 DETERMINATION OF THE EBITDA 78

8.4 EXEMPTIONS FROM THE INTEREST LIMITATION RULE 78


8.6 CONFORMITY WITH ATAD 79

9 GERMAN IMPLEMENTATION OF THE ATAD ANTI-HYBRID RULES 80

9.1 INTRODUCTION 80

9.2 SEC. 4K ITA – OVERVIEW AND STRUCTURE 80

9.3 PAYMENTS RELATING TO FINANCIAL INSTRUMENTS 81

9.4 PAYMENTS BY HYBRID ENTITIES 82

9.5 PAYMENTS TO HYBRID ENTITIES, DISREGARDED PES & OTHER HYBRID MISMATCHES 84

9.6 DOUBLE DEDUCTION AND TAX RESIDENCY MISMATCHES 85

9.7 IMPORTED MISMATCHES 88

9.8 SCOPE OF THE REGULATION AND DEFINITIONS 89

10 ATAD DIRECTIVES AND THEIR IMPLEMENTATION IN FRANCE 91

10.1 BACKGROUND: A BRIEF SUMMARY ABOUT EU LAW INSTITUTIONAL FRAMEWORK 91

10.2 ATAD AND TAXATION OF INTEREST: RATIONALE IN THE INITIAL STATEMENTS 91

10.3 CONCLUSIONS 92

11 FRENCH IMPLEMENTATION OF THE ATAD INTEREST LIMITATION RULE 93

11.1 INTRODUCTION 93

11.2 GENERAL RULE 93


11.4 THE DETERMINATION OF EBITDA 95

CONTENTS

THE ATAD DIRECTIVES

taxand.com

1THE ATAD DIRECTIVES

FOREW0RD

The Anti-Tax Avoidance Directives (ATAD), EU Directive 2016/1164 of 12 July 2016 (ATAD 1), as amended by EU Directive 2017/952 (ATAD 2, ATAD and ATAD 2 referred to as ATAD Directives), today represents the backbone of EU legislation enacted to implement the Base Erosion and Profit Shifting (BEPS) Actions set by the OECD and published on 5 October 2015 in order to counteract national tax policies and measures causing such effects.

Due to high fragmentation of EU Member States tax legislations, especially in direct taxation matters, the EU Commission extrapolated some of the BEPS Actions and in 2016 turned such Actions into an anti-abuse (large) package with the aim of introducing a common minimum European framework in significant areas where national legislations were both truly highly fragmented and fragmentation “per se” gave somehow way to tax abuse.

The areas covered by ATAD Directives are:• the setup of generally accepted anti -avoidance rules;• deductibility of interest expense;• controlled foreign company (CFC) legislation;• exit taxation, i.e tax rules applicable in the event of migration of companies;• hybrid mismatches.

It must be noticed that while many, not all, Member States have already adopted internal measures with respect to items from 1 to 4, it is the first time that a specific set of anti- hybrid mismatches rules, item 5, is introduced.

The issue is not new. Starting from the Seoul Declaration of 2006 and going through all the OECD Papers addressing aggressive tax planning, where it was already clear that most of it was based on hybrid mismatches within international complex financial transactions, the reaction from the EU comes after a long time.

However, in the end, it has come.

Within the Taxand network, we thought it would be time to address at least some of the items of the ATAD Directives and decided to focus on finance.

Europe needs foreign investments, so our focus has been appointed on deductibility of interest expense and hybrid mismatches.

The aim is to provide practical, but detailed, guidelines on the interpretation and material application of such two items of the ATAD Directives both to

tax practitioners and to international investors.

Especially the latter are sometimes inclined to treat Europe as a single area, where, on the other hand, tax differences are normally very deep among EU Member States in spite of the ongoing push

towards higher levels of tax harmonisation and tax coordination.

11.5 THE EXCLUSION OF LONG-TERM PUBLIC INFRASTRUCTURE PROJECTS LOANS 96

11.6 DEDUCTIBILITY OF INTEREST EXPENSES IN CASE OF GROUP CONSOLIDATION 96

11.7 ADDITIONAL DEDUCTION RULES FOR AUTONOMOUS ENTITIES 98

11.8 DEDUCTIBILITY OF INTEREST IN CASE OF A FRENCH TAX CONSOLIDATED GROUP 98

11.9 DEDUCTIBILITY OF INTEREST IN CASE OF THIN CAPITALIZATION 98

12 FRENCH IMPLEMENTATION OF THE ATAD ANTI-HYBRID RULES 101

12.1 SCOPE OF THE FRENCH ANTI-HYBRID RULES 101

12.2 FRENCH ANTI-HYBRID RULES 104

12.3 EXCLUSION FROM FRENCH ANTI-HYBRID RULES 104

12.4 ROLE OF FRANCE IN APPLYING FRENCH ANTI-HYBRID RULES 104

12.5 HYBRID MISMATCHES COVERED BY FRENCH ANTI-HYBRID RULES 104

12.6 IMPACT OF FRENCH ANTI-HYBRID RULES ON INVESTMENT FUNDS 117

12.7 CONCLUSIONS 117

13 DUTCH IMPLEMENTATION OF THE ATAD INTEREST LIMITATION RULE 118


13.2 DETERMINATION OF LOAN, INTEREST EXPENSE AND INTEREST INCOME 118

13.3 DETERMINATION OF THE EBITDA 119

13.4 EXEMPTIONS FROM THE INTEREST LIMITATION RULE 119


14 DUTCH IMPLEMENTATION OF THE ATAD ANTI-HYBRID RULES 121


14.2 DUTCH IMPLEMENTATION LEGISLATION 121

14.3 ARTICLE 13(17) CITA – OVERVIEW AND STRUCTURE 122

14.4 ARTICLE 12AA-12AG CITA 122

14.5 ARTICLE 2 SUB 3 AND SUB 12 CITA: REVERSE HYBRID 128


The further reasons for such a focus are that hybrid mismatch rules are among the less explored items in EU tax law, while interest expense deductibility is by far among the most impacting (thus interesting) tax rules for all kinds of business.

This book will bring focus on each of the two items from two different perspectives, so that for each country the analysis will be mainly twofold (and practically with two separate chapters for each country).

The first kind of analysis (first chapter) will deal with a confrontation between the ATAD EU rules and their execution in national legislations, especially where local Taxand professionals have found relevant discrepancies between the ATAD Directives and the related domestic legislation which executes them.

In fact, though ATAD Directives have to be executed and implemented in national legislations separately in each Country and normally EU directives are not directly applicable, local Taxand professionals will provide their comments on whether or not the letter and the spirit of the directives have been duly executed.

Thus, the outcome of this analysis will vary accordingly, materially depending on how domestic legislators have interpreted and executed the directives.

If they have done “a good job”, this analysis will be very quick and not particularly detailed. If not, it will be the opposite.

The second kind of analysis (second chapter) will deal with an extensive illustration of the new rules as executed in the single domestic legislations, without considering the European perspective.

It is clear that when EU norms become domestic norms, they have to be coordinated with the rest of the legislation, so that certain parameters, interpretations and administrative practise is found proper and not in contrast with other local provisions.

Thus, our further and final targets are to allow the opportunity to have comparative views of domestic legislations available, the ability to capture the main uncertainties about the application of the law on a country-by-country basis, and, where possible, critical comments and expected potential developments, if any.

ATAD Directives are so recent that no case law is available yet.

Among EU Member States legislations under analysis, we have picked up the following from:• Italy• Spain• Luxembourg • Germany• France• The Netherlands

Finally, thank you to all the national authors who have supported this initiative. We hope this book will help everyone to feel more comfortable in the common home of “Taxanders”.


1. ATAD DIRECTIVES AND THEIR IMPLEMENTATION IN ITALY: AN INTERNATIONAL APPROACH

1.1 BACKGROUND: A BRIEF SUMMARY ABOUT EU LAW INSTITUTIONAL FRAMEWORK

The aim of the present chapter is to analyse ATAD Directives and their implementation from an international tax law approach, more specifically from a EU tax law perspective.The starting point is that EU Court of Justice jurisprudence within the framework of the relationships between EU law and Member States national law in respect of the application of EU Directives, has sensibly evolved.

In the past, the main issue such jurisprudence had addressed was about direct applicability of certain provisions of the EU Directives into national law. The efforts of the Luxembourg Court were the interpretation and analysis of Directives provisions in view of evaluating whether or not such provisions met the qualification of directly applicable norms.

Notably, the main conditions of direct applicability of EU Directives were (and are) the following:

1) the terms for the execution of the Directive into national law have expired;2) the provisions of the Directive are sufficiently detailed and clear so that national law in contrast with them has to be disapplied by domestic courts.

If EU rules are directly applicable, EU citizens and entities are entitled to have their rights protected by national courts directly under such rules, even if domestic rules are in contrast with them.

More recent jurisprudence substantially enriched the principles illustrated above with further issues which confirm the trend by which supremacy of EU law is more and more effective and national law in contrast with EU law has to be disapplied, also in the case where EU rules are not directly applicable.

In various occasions the EU Court of Justice stated that national courts have to evaluate both the letter and also the spirit of a EU Directive in order to ascertain that national law has correctly executed such Directive. In fact, EU law must maintain its supremacy towards national law in any event.

A further recurring and relevant principle is the principle of effectiveness, by which the rights assigned by EU law must be truly effective, i.e. exerting such rights must not be hindered or made excessively difficult by other kind of provisions (procedural, etc.).

1.2 ATAD AND TAXATION OF INTEREST: RATIONALE IN THE INITIAL STATEMENTSIn the foreword it is stated that ATAD Directives were enacted with the purpose of creating a minimum common framework of rules within the EU in order to counteract tax evasion and combat base erosion, thus implementing BEPS. The Directives are applicable only to corporate bodies who are subject to corporate income tax; partnerships and other entities are outside the scope of the Directives.

Within such framework, initial statements of Directive 2016/1164 of 12 July 2016 are, as usual, essential to understand and interpret the rationale and the spirit of the Directive, also according to the EU Court of Justice (the “ECJ) jurisprudence (in fact initial statements are mentioned many times in the Court rulings in order to ground their conclusions, such as in ECJ -Grand Section 12 July 2005, C -154/05 and C-155/05, Alliance fo Natural Health and National Association of Health Stores; ECJ 30 April 2014, C-280/13, Barclays Bank S.A.).


Initial statement (6) reports that groups of companies may charge excessive interest in order to reduce the tax burden, and such practise must be addressed through a limitation of such deduction to be set at EBITDA parameters.

Initial statement (7) reports that within groups of companies adopting consolidated statements, tax deduction of interest expense may be calculated on the basis of global indebtedness and allow taxpayers to deduct amounts exceeding the ordinary threshold.Initial statement (8) reports that in order to minimise compliance and administrative burdens a “safe harbour” provision may be introduced so that interest expense can be deducted for an amount higher that the ordinary EBITDA threshold.

Furthermore, the “safe harbour” monetary threshold, set at an amount up to ¤3 million, can be reduced with the aim of protecting the taxable base more effectively.According to the general rationale, since indebtedness of companies not belonging to a group (independent companies) cannot give rise to tax evasion, this kind of companies should be excluded from the application of the Directive.

Finally, initial statement (9) reports that financial intermediaries and insurance companies should also be excluded from the application of the Directive.

1.3 FOCUS ON THE “SAFE HARBOUR” RULE (WHICH ITALY DID NOT EXECUTE)

Art. 4 of the Directive sets a general threshold of deduction of interest expense within 30% EBITDA. The excess interest expense can be carried forward by the company under certain conditions and time limitation.

Art.4, Sec. 3 of the Directive provides for the precise qualification of the “safe harbour” rule whose rationale was illustrated at initial statement (8) (see previous chapter).


In our view, the interpretation and execution of such rule by the Italian legislator might not be compliant with EU law.

As a matter of fact, Italy is the only EU Country which did not implement the “safe harbour” rule, while all the other Member States have with different monetary threshold, in perfect compliance with initial statement (8); it is such statement which expressly indicates that, through the reduction of the monetary threshold, Member States can protect the taxable base more effectively.

In fact, art.4, Sec. 3, lett.a) literally reports that the taxpayer may obtain the right to deduct interest expense up to an amount of ¤3 million.

This leaves Member States with a high degree of flexibility: there is not a fixed amount within the “safe harbour” rule, but an amount “up to”, which implies that any amount within such threshold is legitimate.The crucial point is that the Italian legislator has interpreted the rule as a discretionary and not compulsory one, funding such stand over the word “may” (may obtain the right) reported by art.4, Sec.3.

In other words, the Italian legislator took the stand that the word “may” legitimately allowed the potential choice between implementing or non-implementing the “safe harbour” rule, and subsequently decided not to implement.

In our view the focus should be different, and the interpreter should better look at the spirit of the Directive through the combined analysis of both initial statement (8) and art.4, Sec.3.

Initial statement (8) provides “per se” a protection of the taxable base of Member States through the unlimited flexibility of the monetary threshold, while art.4, Sec.3, subsequently describes the threshold as “up to” ¤3 million, without any minimum fixed parameter or amount.

The “safe harbour” monetary threshold flexibility has been used by all the Member States, except Italy. Some of them introduced the maximum amount of ¤3 million, some others decided to fix it at ¤2 million, and so on.

Thus, in our view, a less literal but more substance-oriented interpretation of the Directive might lead to think that the word “may” of art.4, Sec. 3, does not refer to the “safe harbour” rule as a whole, but only to the monetary threshold, which is an essential part of it.

After all, the aim of the “safe harbour” rule is reducing complexity and compliance burdens for, ideally, small and medium size companies, which is a continuous effort of EU policy and does not jeopardize the targets of the Directive.

From another perspective, it seems that the “safe harbour” rule should be seen as part of the minimum common framework within the anti-abuse provisions set forth by the Directive, so, if such minimum framework is not respected, the spirit of the Directive is not complied with.

Member States are allowed to introduce tax rules which can be more restrictive than those introduced by the Directive, but this concept should reasonably have a limit in the need to pursue the targeted minimum common framework within the EU. If the basic rules of the common framework are not respected, then the Directive would lose any relevance.

From the above interpretation it derives that Italy might have failed to properly implement the ATAD Directive since the introduction of the “safe harbour” rule does not seem discretionary but an essential part of the implementation of the Directive.

In the end, since ATAD is aimed at setting up a minimum common framework in the EU, the lack of a common rule as the “safe harbour” in one Member State (Italy) weakens “per se” the whole European set up.

Due to the application of a threshold for a discretionary amount, it does not seem possible to apply the principle by which the national judge should be bound not to apply national law when it leads to results which are in contrast with EU Law (ECJ 4 October 2018 – C-384/17, Skopje Link Logistic), which is typical of the cases when a directive is directly applicable.

In the case at hand, our interpretation is in the sense that Member States have an obligation to introduce a “safe harbour” rule, though the amount of the monetary threshold remains, to a certain extent (up to), discretionary. The above prevents norms from being considered as directly applicable according to ECJ jurisprudence (ECJ 19 January 1982, C- 7/82, Becker; ECJ 15 January 2014, C-176/12, Association de médiation sociale; ECJ 7 July 2016, C-46/15, Ambisig).

However, Italy had an obligation to pursue the results provided for by the Directive (ECJ 14 September 2016, C-184-15 a, Martinez Andrés e Catrejana; ECJ 24 January 2018, C- 616/16 and C-617/16, Pantuso), so it should have somehow introduced such a rule into its national legislation, no matter what the monetary threshold would be.

Since Italy failed to do so, such failure may be considered a violation of the Directive and of EU Law.

It would be subsequently interesting to have this issue raised before the ECJ.


It must be reminded that one of the main features of the ATAD Directives is that they are applicable only to corporate bodies subject to corporate income tax.

Partnerships are out of scope, so it is clear that they can benefit from unlimited interest expense deductibility.

According to the EU Commission Recommendation of 6 May 2003 n.361 about the qualification of SMEs (small and medium size enterprises), as executed by the Italian Ministerial Decree of 18 April 2005, the Italian economic environment is substantially made of SMEs together with a large number of micro-enterprises, whose business size and volume of assets is normally below those of SMEs.

This implies that, the number of partnerships, which is the typical form of micro and small size enterprises in Italy, is extremely large.The factual and material effects is that several entrepreneurial activities which are carried on both by partnerships and by companies in direct competition, are that the latter have an economic disadvantage because of ATAD Directives rules on interest expense deductibility.

Though, in our view, such distortion does not create “per se” legal discrimination due to the material differences between partnerships and corporates under general tax law, the question is whether or not, in the framework of addressing tax evasion through charge of excessive interest expense, such difference results rational or irrational.

The trend of our thoughts goes into two directions.

From an EU perspective, according to art. 4, Sec 3, lett. b), independent companies should be left out of the scope of the Directive because no tax evasion can take place in the

1.4 DEDUCTION OF INTEREST EXPENSE BY COMPANIES: WHAT ABOUT PARTNERSHIPS?


The above does not materialize in Italian national tax law, where independent companies are also subject to the 30% EBITDA deductibility threshold, while partnerships are not.

This leads to the irrational result that independent companies and partnerships ideally having the same assets and liabilities size, having the same turnover and performing the same activity, with none of them under the risk of putting in place any abuse of law related to deduction of excessive interest expense, are treated differently.

Again, the above does not seem compliant with the targets and the spirit of the Directive.

In our view, in order to minimize the effects shown above, introducing the “safe harbour” rule would seem the most reasonable solution.

In fact, since partnerships ordinarily manage micro, small and (more rarely) medium size business, willingness to create a level playing field in respect of independent companies and to prevent any form of discriminatory taxation, substantially suggests that the tool offered by ATAD Directive is only the “safe harbour” rule.

If, in the theoretical case shown above, both independent companies and partnerships were both exempted from the application of the 30% EBITDA threshold thanks to a proper “safe harbour” rule, the effects of such an irrational system of taxation as the one in place in Italy now, would be materially reduced.

case of non-intra-group financing, thus independent companies and partnerships, which normally do not belong to groups of companies and do not subsequently give rise to any intra-group financing, should be effectively treated the same way.

1.5 CONCLUSIONS

We think that the analysis put in place in previous paragraphs raises some concerns about the proper implementation of the ATAD Directives rules related to interest expense deductibility into the Italian national tax system.

The focus was essentially on the non-implementation by Italy of the “safe harbour” rule as set forth in art.4, Sec. 3, lett. a) of ATAD, which makes the above the only exception among all Member States.

The result of our survey shows how relevant this rule is within the effort to introduce a common EU framework in this area.

In fact, it seems to us that without a safe harbour there is, at first, no potentially possible EU common framework, thus undermining the aims and targets of ATAD Directives and subsequently violating EU Law, and , secondly, the resulting system brings to practical irrational consequences.

In the end, safe harbour rules are an essential part of the common framework set by the ATAD Directives and, in our view, Italy should implement them as all the other EU Member States.


Aggressive tax planning jeopardises one of the principles on which a fair and coordinat-ed tax system is based, namely ensuring that tax is paid where profits and value are gen-erated. These new political objectives have been translated by the European Council in the ATAD Directive1 of 12 July 2016 (ATAD 1), implemented in Italy through the Legislative Decree n. 142/2018 (D.Lgs. 142/2018).

In this respect, the ATAD 1 lays down rules to strengthen the average level of protection against aggressive tax planning by providing a set of general provisions in five specific fields, the first of which is the limitation to the deductibility of interests.

Indeed, as reported in the initial statement (6) – in an effort to reduce their global tax liabilities – groups of companies have increasingly engaged in base erosion and profit shifting practices, through excessive interest payments; to this end, an interest limitation rule was necessary to discourage such practices by limiting the deductibility of taxpayers’ exceeding borrowing costs. In particular, ATAD 1 laid down a minimum standard in the form of a general interest limitation rule based on the EBITDA whilerecognizing that EU Member States could also adopt additional targeted rules against excessive interest financing2.

Therefore, Art. 96 of the Consolidated Direct Tax Code (“CDTC”) that governs the deductibility of interests was redrafted by the D.Lgs. 142/2018, even though the previous one was already in line with the compulsory provisions provided by the ATAD Directive,

2.1 INTRODUCTION


namely the deductibility of interest expens-es (net of interest income) in the limit of the 30% EBITDA.

This situation would have given the possibility to the Italian government to maintain the previous rules into force and to postpone the implementation of the UE provisions until the 2024: however, the choice has been to modify the rules not in line with effects starting from the 2019.

According to par. 5 – which was not amended by the implementation of the ATAD 1– interest expenses that, in a tax period, exceeds (i) the interest revenues of the year, (ii) the interest revenues carried forward, (iii) the 30% EBITDA of the year and (iv) the 30% EBITDA carried forward (“exceeding interest expenses”), are not deductible in the relevant tax period and are carried forward to the following fiscal years, without any time limit.

Such exceeding interest expenses may, therefore, be deducted in a subsequent fiscal year if and to the extent the sum between the interest revenues and the 30% EBITDA is higher than the interest expenses of that tax period. Par. 6 provides, in an innovative way, that if interest revenues accrued in a tax period exceed the interest expenses (“exceeding interest revenues”), such excess may be carried forward to subsequent tax periods – without any time limit – and can be used to compensate future interest expenses. On the other hand, if – in a tax period – the 30% EBITDA is higher than the net interest expenses (“excess of 30% EBITDA”), such excess can be carried forward for a maximum of five years to offset future exceeding interest expenses. In this respect, it should be highlighted that in the past there was not any time limitation for the carry forward of the excess of 30 EBITDA.

Against this background, it is worth analysing further some of the amendments to the interest limitation rules brought from the implementation of the ATAD Directive.

According to par. 1, as described above, the interest limitation rule now applies also to capitalised interest expenses included in the balance sheet value of a related asset, as expressly provided by Art. 2, par. 1 of the ATAD Directive; this would mean that the deductibility of the interest expenses should be verified in the year of capitalization in the balance sheet, thereby denying the

entire or partial deducibility of such interest, without prejudice to the recognition for tax purposes of the depreciations of the value of the assets to which they refer3. In addition, interest expenses may now be offset not only against the interest revenues of the tax period but also against the excess of interest revenues of the past years carried forward; this rule, even though not expressly provided by the ATAD Directive, is in line with its purposes and is motivated by the fact that – as a consequence of the decision to consider as interest expenses and revenues those that qualify as such on the basis of the accounting principles adopted – there could be situations in which, having regard to a specific transaction, a year may be characterized by an excess of interest revenues and the following ones by exceeding interest expenses. Consider, for example, the case of taking out an interest-bearing loan with an interest rate lower than the market one which should be measured at fair value discounted by using the prevailing market rate(s) of interest for a similar instrument. This would lead, initially, to the recognition of the day-one profit – which gives rise to an interest income – and, subsequently, to the accounting of the interest expenses at market rate.

2 ITALIAN IMPLEMENTATION OF THE ATAD INTEREST LIMITATION RULE

1 Council Directive (EU) 2016/1164 of 12 July 2016.2 D. Frescurato, The New Definition of Financial Intermediaries under Italian Tax Law Following the Implementation of the Anti-Tax Avoidance Directives, Derivatives & Financial Instruments, n. 60, 2019; D. Fernley & M. Moroney, EU Anti-Tax Avoidance Package: Impacts on Financial Institutions, Derivatives & Financial Instruments, 2016, n. 4; P. Van Os, Interest Limitation under the Adopted Anti-Tax Avoidance Directive and Proportionality, EC Tax Review, n. 4, 2016; M. Tell, Interest Limitation Rules in the Post-BEPS Era, Intertax, n. 11, 2017.

2.2 GENERAL RULE

According to the new Art. 96, par. 1, interest expenses and other costs economically equivalent to interest (for simplicity “interest expenses”), including those capitalized in the cost of the assets, are deductible in the tax period in which they are incurred up to:

i. the amount of interest revenues and other economically equivalent taxable revenues (for simplicity “interest revenues”) of the year;

ii. the amount of interest revenues carried forward from previous fiscal years, as described later.

Under par. 2, any excess of interest expenses over interest revenues (for simplicity “net interest expenses”) is deductible up to an amount equal to the sum of the 30% of EBITDA of the tax period and the unused 30% EBITDA carried forward from previous years. In this respect, the new law clarifies that the net interest expenses should be, firstly, offset against the 30% EBITDA of the year and, subsequently, against the 30% EBITDA carried forward under the so called “FIFO” method, namely starting from the least recent. 3Explanatory Report to the D.Lgs 142/2018.

4Explanatory Report to the D.Lgs 142/2018.5According to Art. 2435-ter of the Italian Civil Code micro-enterpris-es” as those that for two consecutive years do not meet two of thefollowing three criteria: (1) averaged hired employees higher than 5, (2) assets of the balance sheets higher than Euro 175k; (3) turnover higher than Euro 350k.

2.3 THE DEFINITION OF INTEREST EXPENSES AND REVENUES

Before addressing the specific topic object of this paragraph, it would be useful to provide some general comments on the main characteristics of the “derivation principle” which consists in considering relevant for tax purposes the accounting representations of the different balance sheet and P&L items. Such principle, that is aimed to reduce the discrepancies between the operating profits and the taxable basis, was firstly introduced for the IAS/IFRS adopters but – as a consequence of the redraft of the Italian accounting standards – since 2016 it has been extended to the Italian GAAP adopters, with the exclusion of the micro-enterprises5.


According to the derivation principle, as ruled by Art. 83, par. 1 of the CDTC, in derogation to the general tax principles, the qualification criteria, the time-based recognition and the classification in the financial statements provided by the accounting standards adopted (either Italian GAAP or IAS/IFRS) are relevant for the computation of the taxable base:

• the qualification criteria refer to the exact identification of the transactions that have taken place and their effects from an eco-nomical, juridical and contractual point of view. These criteria would substitute juridical and formal approach with the substantial;

• the classification criteria are the direct con-sequence of the identification ones and allow the correct representation in the financial statement of the balance sheet and P&L items;

• time-based recognition refers to the period in which the revenues and expenses become relevant for tax purposes and it is strictly linked to the economic accrual principle.

That being said, Art. 1 of the D.Lgs. 142/2018 substantially amended the definition of interest expenses and revenues6. More in particular, under the new par. 3 of Art. 96, which defines the objective scope of the provision, interest expenses and revenues relevant for the purpose of the rule are those that:

i. are accounted as interests according to the applicable accounting principles (Italian GAAP or IAS/IFRS);ii. their accounting treatment as interest is confirmed by the tax rules; andiii. arise from transactions or contracts having a financial purpose or incorporating a signifi-cant financial component.

In this respect, it is worth noting that the BEPS Actions 47 affirms that the interest limitation rules should be applied not only


to interest expenses on all forms of debts but also to other costs economically equivalent to interest, having to ascertain the equivalence on the basis of the economic substance rather than the legal form. For that reason, bearing in mind that the accounting representation based on the substance over form principle applies to both the financial statements under the Italian GAAP and the IFRS, it was decided to limit the objective scope of the rule to the interest expenses and revenues that qualify as such under the accounting principles and for which the qualification is confirmed from a tax standpoint.

Therefore, from a procedural point of view, it should be firstly determined whether a specific item qualifies as interest from an accounting point of view, then verify if such qualification is not denied from a tax perspective and, lastly, ascertain that such interests refer to a financial transaction or a contract with a significant financial component.

As far as point i) is concerned, neither Italian GAAP nor IAS/IFRS provide a clear definition of interest expenses and revenues. The Italian GAAP n. 12 provides a non-exhaustive list of items of the P&L account that should be treated as such. However, several circumstances from other accounting principle may give rise to revenues and expenses that should be assimilated to interest8, such as:

a. fees, transaction costs and other premiums or discounts that adjusts the contractual interest rate on the basis of the amortised cost method provided by Italian GAPP 19, par. 45 and IFRS 9, par. B 5.4.4;

b. higher or lower interests deriving from the discounting of financial liabilities granted at an interest rate considerably different to the market one (Italian GAPP 19, par. 50 and IFRS 9, par. B 5.3).

On the other hand, some doubts may arise with regards to the qualification of other elements.

For example, as already pointed out, a financial asset/liability with an interest rate lower than the market one should be measured at fair value discounted by using the prevailing interest market rate. This would lead to a recognition of the day-one profit/loss that should be accounted as financial income/expenses, unless from the substance of the transaction it may be concluded that such component has a different nature. In principle, the day-one profit/loss booked as a financial component at initial recognition should be qualified as interest expenses/revenues from the purposes of Art. 96 of the CDTC, because linked to higher/lower interests that will be booked in the future in the P&L account9. However, if the day-one profit/loss did not have a financing nature, the result would be different. For example, in case of a free interest-bearing loan granted to an employee, the difference between the amount borrowed and its fair value should be treated as a salary in kind which should be booked as employee costs. Therefore, the requirement of being classified as interest according to the applicable accounting principles would not be satisfied10.

Under par. 3.3.2. of the IFRS 9, the exchange, between an existing borrower and lender, of debt instruments with substantially different terms shall be accounted as an extinguishment of the original financial liability and a recognition of a new one. In such a case, under par. 3.3.3. “the difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss”. In this respect, according to prominent scholars11, the profit or loss deriving from the extinguishment of the financial liability should be treated for accounting

purposes as a “realized income/loss” and, therefore, taxed as an extraordinary income or a receivable write-off, with the result of being excluded from the scope of the interest limitation rule.

On the other hand, under par. B3.3.6 of IFRS 9, in case of a “non-substantial” exchange or modification of a debt instrument which does not trigger a derecognition event, any costs or fees incurred should adjust the carrying amount of the liability with the subsequent modification of the effective interest rate. In addition, the modifications of the contractual cash flows deriving from renegotiation of the financial liability should not revise the effective interest rate but should be recognised in the P&L as income or expense12. Therefore, in principle, the first should fall within the scope of Art. 96 and the latter should not be subject to the interest limitation rules.

Another example are the components related to a hedge contract having as hedged item a financial instrument that should fall within the definition of interest for accounting purposes because – in the P&L accounts – they offset the interests deriving from the hedged financial instrument. On the other hand, the component that is hedge ineffectiveness should not fall within the definition of interest, lacking the economic relationship between the hedged item and hedging instrument. Indeed, in general, when the hedging instrument is not totally hedge effectiveness, because, for example, its quantity is higher than hedged item, the exceeding amount should not be booked as hedging instrument, with the result that the cash flows arising from it would not qualify as interest lacking the link with the entity’s borrowings13.

Having determined the accounting qualification, it should be verified whether such qualification is also confirmed for tax purposes.

6 Under the previous rule, the relevant interest expenses and revenues relevant for the limitation rules were those derived from loans, financial leasing transactions, issuances of bonds and similar instruments and any transaction having a financial purpose, with the exclusion of expenses accruing on trade payables but the inclusion of interest accruing on trade receivables.7 OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments – Action 4: 2015 Final Report, 2015.8 See, R. Michelutti, L’ambito oggettivo del nuovo art. 96 del T.U.I.R.: i tre requisiti concorrenti, Corriere Tributario, 8-9, 2019.

9 Ibid10 Ibid11 Ibid12 Ibid13 L. Rossi and M. Ampolilla, Valutazioni dei derivati di copertura di ‘cash flow hedge’ per i soggetti IAS/IFRS, Corriere Tributario, n. 6, 2009.


This analysis, for example, would lead to the result that the following items would beexcluded from the scope of the rule:

a. interest deriving from the application of the amortized cost method in case of micro-enterprises, as defined in Art. 2435-ter of the Italian Civil Code, because for such companies the derivation principle is not applicable;

b. interest from repurchase agreements of stocks14;

c. interest from the discounting of liabilities of uncertain amount15;

d. interest from the discounting of free interest-bearing loans between associated enterprises that at initial recognition must be booked as an increase of the net equity (for the borrower) and an increase of the cost of the participations (for the lender)16.

Finally, the interest must be incurred in connection with raising of finance or from contracts with a significant financingcomponent. In this respect, the clarifications given by the Italian Tax Authorities in the Circular Letter 21 April 2009 n. 19 are still valid, where it is stated that the rule is applicable to i) “any and all interest (or similar expense) incurred in connection with the raising of finance or the making available financial instruments or other assets for which there is a repayment obligation and which provide a specific remuneration” and ii) “any revenue, expenses or positive/negative item of income which under a substance over form approach should be assimilated to an interest”. Even though the new Art. 96 does not contain any more a list of transactions of financing nature , the rule is still applicable for interest derived from loans, financial leasing transactions, issuances of bonds and similar instruments and any transaction having a financial purpose.


In addition, the new wording of Art. 96 now clarifies that interest expenses/revenues deriving from commercial transactions with a significant financing component (such as for delivery of goods or services that provide a deferral of payment) – which in accordance with the accounting principles should be booked separately as a financial item – fall within the scope of the rule. On the other hand, the interest costs from the severance packages (TFR), the timing value of the call/put options and forward contracts and interest for late payment should be excluded from the scope of the rule lacking the financing element, namely the raising of finance with a repayment obligation18.

Having said that, the new par. 3 of Art. 96 specifies that interest revenues are relevant for the purposes of the rule in so far as they are taxable. For example, in case of participating bonds, namely those that pay the holder dividends as well as interest, the amount of the income that qualifies as dividend and may benefit of the participation exemption regime would be excluded from the scope of the rule19.

In addition, it is specified that – regardless the accounting treatment as equity instrument – proceeds that are fully taxable in the hands of the recipient are included in the definition of interest income. For example, proceeds from equity instruments that are deductible in the hands of the issuer (such as the Brazilian Juros Sobre or Capital Proprio) are fully taxable in the hands of the recipient – under art. 44, par. 2, let. A) of the CDTC – and, therefore, are included in the definition of interest income20.

Even though the Explanatory Report to the D.Lgs 142/2018 makes only reference to equity instruments issued by non-resident persons, it is believed that the Italian legislator wanted to align the objective scope of Art. 96 with the fiscal definition of instruments similar to shares21 and

similar to bonds22 – as provided by Art. 44, par. 2 – which cannot be derogated by the classifications provided by the accounting principles adopted23.

Therefore, if a financial instrument is booked in the balance sheets as equity but it does not fulfil the requirements to be treated for tax purposes as “similar to shares” – because its return is not entirely made up by the participation to the economic results of the issuer – the remuneration derived from such instrument will qualify as interest revenue for Art. 96 purposes to the extent that is taxable in the hands of the recipient.

Similarly, an IAS/IFRS adopter that issuesperpetual bonds – that do not have a maturity period and provide a discretional payment of coupons – should treat them – for accounting purposes – as an equity instrument. Consequently, the coupon payments will not be booked in the P&L accounts but will reduce the net equity of the issuer. From a tax perspective, the perpetual bond will not be qualified as “similar to shares”, with the result that the coupon payments – even though not booked as interest – should qualify as such and, therefore, should fall within the scope of Art. 9624.

14 See Art. 3, par. 3 of the Ministerial Decree 8 June 2011.15 See Art. 9, par. 2 of the Ministerial Decree 8 June 2011.16 See Art. 5, par. 4-bis of the Ministerial Decree 8 June 2011.17 See note n. 4.18 & 19 Explanatory Report to the D.Lgs. 142/2018.20 Ibid21 According to art. 44, par. 2 of the ITC, similar to shares means a financial instrument issued by a company or an entity having a main commercial purpose, whose return is entirely made up by a participation (a) to the economic results of the issuer or (b) the economic results of another company of the same group or (c) the economic result of a single deal relating to which the securities or the financial instruments were issued; in the case of non-resident issuers, it is also required that the said remuneration paid is entirely non-deductible in the country of residence of the issuer.

2.4 THE DETERMINATION OF THE EBITDAArt. 96, par. 4 provides the definition of EBITDA bringing it in line with the provisions of the ATAD Directive. The starting point is the computation of the operating earnings, namely the difference between revenues and expenses that are directly associated with the operating business, to which depreciations, amortization and financial leasing costs must be excluded.

22 According to art. 44, par. 2 of ITC, similar to bonds are defined as “mass securities containing the unconditional obligation to pay, at maturity, a sum corresponding to not less than the nominal value indicated in them, with or without the payment of a periodic remu-neration, which do not confer upon the holder any direct or indirect management right relating to the issuer or the deal relating to which the security was issued, and do not give any control over the management itself”.23 R. Michelutti, Art. 96 del T.U.I.R.: imponibilità degli interessi attivi, ROL fiscale ed esclusione del project financing, Corriere Tributario, 10, 2019.24 According to Art. 5, par. 3 of the Ministerial Decree 8 June 2011 and Art. 109, par. 4 of the ITC remunerations of financial instruments similar to bonds could be deducted even though not booked in the P&L accounts but in reduction of the net equity.25 Explanatory Report to the D.Lgs 142/2018.26 R. Michelutti, Art. 96 del T.U.I.R.: imponibilità degli interessi attivi, ROL fiscale ed esclusione del project financing, Corriere Tributario, 10, 2019.27 More in particular, under Art. 96 EBITDA shall be the difference between the “value of production” (let. A of Art. 2525 of the Italian Civil Code and the “cost of production” (let. B of Art. 2525), except amortization and depreciation of tangible and intangible assets and payments from financial lease.

In this respect, first of all, extraordinary income and expenses deriving from the transfer of going concerns are not excluded anymore from the computation of the EBITDA.

In addition, the new paragraph does not make reference anymore to the accounting EBITDA but to the tax-adjusted EBITDA. Indeed, the items should be taken for the amount that is relevant for tax purposes. This would lead, for example, to the followings:

• in case of long-term projects valued for accounting purposes with the cost method, the EBITDA should be determined by assuming such project on the basis of the percentage of completion method, with the result of anticipating the inclusion of the margin of the contract25;

• in case of non-long-term projects valued for accounting purposes with the percentage of completion method, the EBITDA should be determined by assuming such project on the basis of the cost method, with the result of postponing the inclusion of the margin of the contract;

• in case of capital gains for which the taxpayer has chosen to spread them in equal instalments over five years, the EBITDA should be redetermined accordingly;

• in case of tax-neutral contribution of a going concern, the capital gains arising from it should be excluded26.

“Given that Art. 96, par. 4 provides a definition of EBITDA on the basis of the P&L accounts as ruled by the Italian GAAP27-


it is stated that IAS/IFRS adopters must consider the corresponding items of their P&L accounts”.

In the past, the literal wording of the provision limited the field of “research” only to the items of the P&L accounts, without considering those booked in the other comprehensive income (OCI) or in the net equity. With the new provisions – as a consequence of the introduction of the tax-adjusted EBITDA – the field of research must be extended28. Therefore, for example, the costs related to severance packages (TFR) should include the interest costs (booked in the financial expenses) and the actuarial gain and losses (booked in the OCI)29.

In addition, as far as tax allowances is concerned, their relevance for EBITDA purposes will depend on whether such allowance is linked to a specific item ofincome or it qualifies as a general deduction not linked to any specific income:

• in the first case, such as the branch exemption regime, the income excluded from taxation will reduce the EBITDA;

• in the second case, for example in case of “allowance for corporate equity”, the deduction will not have any impact on the EBITDA.

Finally, some scholars are of the opinion30 that, in case of a tax audit, the higher taxable basis as a consequence, for example, of a challenge on the deductibility of certain operating expenses, could be reduced by the higher deduction of interest expenses deriving from the higher tax-adjusted EBITDA of that fiscal year. This because, in the view of restoring the situation that would have been verified ab origine if the taxpayer had not deducted such cost, such non-deductible cost – if relevant for EBITDA purposes – would have increased the tax-adjusted EBITDA amount.


With the new Art. 96, the interest limitation rules for project operators have been amended through the introduction of an “objective” exclusion. Indeed, the previous rule, based on a “subjective” exclusion, was not in line with the provisions of the ATAD Directive.

In particular, a first version of the new Art. 96, paragraphs 8-11 of the CDTC, as amend-ed by the D.Lgs. 142/2018, excluded from the scope of the rule the interest expenses incurred on loans used to fund a long-term public infrastructure project (LTPIP) provid-ed that:

a) such loans were secured by neither (i) the assets that belonged to the operator and did not concern the same LTPIP nor (ii) by other persons different from the operator. In other terms, the project should have been secured only by assets that belonged to the operator and concerned the same LTPIP;

b) the LTPIP operator was tax resident in a Member State of the European Union; and

c) the assets used for the realization of the project and the assets constituting the ob-ject of the LTPIP were located in a Member State of the European Union.

With regard to point sub a), it is worth noting that in case of SPV set up exclusively for the construction and management of the LTPIP, it is a general accepted market practice the inclusion in the so called security package of the pledge of the SPV’s shares or the assignment, as collateral, of the shareholder loans granted to the SPV31. In these circumstances, the new requirements precluded the applicability of the exclusion rule because the loans were guaranteed by assets not belonging to the operator.

For such reason, with Art. 35 of the D.L. 26 October 2019, n. 124, the Italian legislator – without changing the requirement sub c) and c) – modified the Art. 96 by providing that the operators, characterized by a segregated asset regime in respect of the other assets and liabilities not related to the LTIPI, can fully deduct the interest expenses even though the loans are secured by additional forms of guarantee.

In addition, the new article provides that if the LTPIP constitutes a “separate estate” in respect of the other assets and liabilities of the operator – namely is characterized by a segregated asset regime – or it is established that the loan is refunded exclusively with the positive cash flows generated by the LTPIP, the interest expenses excluded from the scope of Art. 96 are those that accrues on the “segregated estate” or that are exclusively destinated to the LTPIP.

In the other cases, the interest expenses excluded from the limitation regime should \be determined by multiplying the total amount of interest by the proportion between the amount of revenues (and increases in the inventory and work in progress) related to the LTPIP and the total amount of revenues (and increases in the inventory and work in progress).

Finally, it is stated that if some of the interest expenses fall within the cause of exclusion, the tax-adjusted EBITDA should be determined without considering income and expenses related to the LTPIP.

More in particular, exceeding interest expenses incurred by one company in a period of tax consolidation may be offset against (i) the exceeding interest revenues of other companies of the tax group accrued in that period, (ii) carried forward exceeding interest revenues of other companies of the tax group accrued in a period in which the tax consolidation was in place, (iii) excess of 30% EBITDA of other companies of the tax group generated in that period, (ii) carried forward excess of 30% EBITDA of other companies of the tax group generated in a period in which the tax consolidation was in place.

In other terms, the computation of the non-deductible interest is performed at the level of the single entity but the amount, in principle, not deductible on a stand-alone basis may be transferred to the consolidating entity and deducted if and to the extent another company has exceeding interest revenues or an excess of 30% EBITDA.

28 Ibid29 Explanatory Report to the D.Lgs 142/2018.30 R. Michelutti, Art. 96 del T.U.I.R.: imponibilità degli interessi attivi, ROL fiscale ed esclusione del project financing, Corriere Tributario,10, 2019.31 G. Zorzi, R.A. Papotti, S. Schiavini, Decreto ATAD in fuorigioco sul project finance, il Sole 24 Ore, 10 December 2018.

2.5 THE EXCLUSION OF PROJECT FINANCING

2.6 DEDUCTIBILITY OF INTERESTEXPENSES IN CASE OF TAX CONSOLIDATION

Par. 14 of Art. 96 has been redrafted in order to allow – in case of tax consolidation – the offsetting of the exceeding interest expenses incurred by a company with both the exceeding interest revenues and the excess of 30% EBITDA of other companies of the tax group.

2.7 REAL ESTATE COMPANY

Two rules contained in the Budget Law 200832 regulate the deductibility of interest expenses in case of companies operating in the real estate market.

More in particular, Art. 1, par. 35 of the Budget Law 2008 provides that “the expenses and other costs that are non-deductible, under par. 2 Article 90 of the Presidential Decree n. 917 of 22 December 1986, do not include interest expenses relating to loans for the acquisition of the real estate listed in paragraph 1 of Article 90”.

32 Art. 1, par. 35 and 36 of Law 24 December 2007, n. 244.


It is worth noting that Art. 90, par. 2 of the CDTC provides that the expenses – related to immovable properties that are neither instrumental assets for the purposes of the business nor assets the production or the transfer of which is the business activity of the company – are not deductible. Against this rule, the authentic rule of interpretation provided in the Budget Law 2008 clarified that the loans for the acquisition of the immovable proprieties listed in Art. 90 does not fall within the non-deductibility provision and, therefore, must be subject to the ordinary interest limitation provision of Art. 96. In this respect, the ITA has also clarified that exclusion rule is not limited to the interest expenses related to the purchase of the real estate asset but also to those incurred for its construction, leaving the applicability of Art. 90, par. 2 only to the interest expenses incurred for the functioning of the business.

On the other hand, Art. 1, par. 36 of the Budget Law 2008 states that interest expenses related to loans secured by mortgages on properties held to be rented are not relevant for the purposes of Art. 96 of the CDTC and are, therefore, fully deductible.

At that time, the provision was a transitional rule that should have produced effects until the implementation of a new system of rules aimed at the simplification and rationalization of the existing direct and indirect tax system for real estate companies. However, given the failure to introduce such new set of rules, the provision has been perceived as final33.

Briefly, the rule – as amended by the D.Lgs. 14 September 2015, n. 147 – provides that:

i. it applies for companies which are effectively and principally engaged in real estate activities, namely those that – at the end of the relevant tax period – have balance sheets assets constituted for the most part of their market value34 by immovable property to


be rented out and with at least two thirds of revenue constituted by proceeds from the lease of property or business whose aggregate value mainly consists of the market value of buildings;

ii. the interest expenses should relate to mortgage loan for the purchase or construction of immovable properties held to be rented;

iii. the mortgage should relate to the same property held to be rented;

iv. the rent may also occur after the acquisition of the property but, in any case, should be proved based on objective elements (such as BoD resolutions)35;

v. it applies also to the re-financing for the amount that does not exceed the original loan taken out to purchase the real estate asset.

Against this background, it should be pointed out that the “new” Art. 96 – as amended by the draft Legislative Decree 142/2018, approved by the Council of Minister on 8 august 2018, – neither proposed a revival of the provisions contained in Art. 1, par. 36 of the Budget Law 2008 nor its repeal. For that reason, in the first instance, it was believed that the rule was still applicable because if the intention was to abolish it, it should have been done explicitly.

In this respect, the 6th Senate Finance Committee suggested the Italian government to extend the applicability of Art. 96 also to interest expenses related to loans secured by mortgages on properties held to be rented by real estate companies. The Italian Government accepted the proposal and in the final draft of the D.Lgs. 142/2018 introduced Art. 14, par. 2 which provided the repeal of Art. 1, par. 36.

However, this decision has been criticized by the trade associations due to the tightening of the taxation of the real estate companies for which the amendment would have led to a higher taxation of 5 percentage points. The requests of the trade associations have been accepted by the Italian government that with the Budget Law 201936 repealed Art. 14, par. 2 of the D.Lgs. 142/2018 and confirmed the application of provisions contained in Art. 1, par. 36 of the Budget Law 2008.

Having said that, some scholars37 questioned about the compatibility of the aforementioned provision with the ATA Directive which do not contain derogation for real estate companies. In this respect, it is worth noting that the interest limitation rules provided by Art. 4 of the ATAD 1 represent a minimum standard to which each Country should comply with in the execution and implementation of the Directive in the national legislation, taking into account the peculiarities of its national tax system. In addition, the ATAD 1 also allows, by derogation of the general rule, the taxpayer to deduct net interest expenses for an amount higher than the 30% EBITDA, in circumstances where the risk of base erosion and profits shifting is lower38.

In the light of the above, considering that – in general – the indebtedness of real estate companies does not give rise to risks of tax evasion, the exclusion under analysis should not be read as in contrast with the ATAD 1 but as a provision aimed to ensure the financial stability of real estate companies. Indeed, for these companies that borrows money – for the acquisition of immovable properties to be rented – at an interest rate just below the rental charges, the interest non-deductibility may result in uneconomical business39.

With regard to the possibility of using interest expenses for base erosion practices, the OECD, firstly, recognized in the BEPS Action 4 that the general interest limitation rule is unlikely to be effective in addressing concerns related to banks and insurance companies and, secondly, recommended that each country should identify the specific risks, taking into consideration the characteristics of the industry and the regulatory requirements . If no risks are identified, companies of such sectors can be excluded from the general limitation rule; on the other hand, if certain risks are identified, the countries should address such risks through appropriate rules, also considering the applicable regulatory regime and tax system41.

In the same way, ATAD 1 recognized that although it is generally accepted that financial undertakings should also be subject to limitations to the deductibility of interest, it is equally acknowledged that these two sectors present special features which need a more customised approach. For such reason, ATAD 1 concluded that, since discussions in this field are not yet sufficiently conclusive in the international and Union context, it is not yet possible to provide specific rules in the financial and insurance sectors and Member States should therefore be able to exclude them from the scope of interest limitation rules42.

In the light of the above, it is worth noting that the implementation of the ATAD 1 in the Italian legislation did not have any impact on the interest limitation rules for banks and insurance companies.

33 Assonime Circular Letter, 18 November 2009, n. 46.34 ITA Circular Letter 4 August 2008, n. 36.35 ITA Circular Letter 22 July 2009, n. 37 and Assonime Circular Letter, 14 June 2016, n. 17.

2.8 BANKS AND INSURANCE COMPANIES

36 Law 30 December 2018, n. 145.37 L. Gaiani, Nelle immobiliari interessi deducibili al 100%, Il Sole 24 Ore, 29 December 2018; M. Dimonte – S. Grilli, Interessi, deducibilità a rischio, Italia Oggi, 29 December 2018.38 Par. 3, of Art. 4 of the ATAD 1 provides that: “By derogation from paragraph 1, the taxpayer may be given the right: (a) to deduct exceeding borrowing costs up to EUR 3 000 000; (b) to fully deduct exceeding borrowing costs if the taxpayer is a standalone entity.For the purposes of the second subparagraph of paragraph 1, the amount of EUR 3 000 000 shall be considered for theentire group”.39 G. Ferranti, Interessi passivi delle società immobiliari di gestione: resta la deduzione integrale, Il fisco, n. 3, 2019.40 D. Frescurato, The New Definition of Financial Intermediaries under Italian Tax Law Following the Implementation of the Anti-Tax Avoidance Directives, Derivatives & Financial Instruments, N. 60, 2019.41 Ibid.42 Initial statement (9) of the ATAD 1.


Indeed, the Italian government exercised the option to exclude financial intermediaries, insurance companies and parent companies of insurance groups from the scope of the general interest limitation rule. At the same time and in line with the previous rule, Art. 96, par. 13 of the CDTC provides that insurance companies, parent companies of insurance groups, asset management companies and qualifying brokerage companies can deduct interest expenses only up to 96% of the amount. On the other hand, financial intermediaries can fully deduct interest expenses.

In this respect, it is worth noting that the new provision should be coordinated with the new definitions of financial intermediaries, as provided by art. 162-bis of the CDTC. In particular, the following definitions have been clarified:

a) financial intermediaries:

i. the entities referred to in art. 2, paragraph 1, letter c), Legislative Decree 28 February 2005, no. 3843 and entities with a permanent establishment in the territory of the State having the same characteristics;

ii. the credit consortia (confidi) registered in the list indicated in art. 112-bis, Legislative Decree 1 September 1993, no. 385;

iii. the microcredit operators registered on the list referred to in art. 111, Legislative Decree no. 385;

iv. the entities that exclusively or prevalently carry out the acquisition of shareholdings in financial intermediaries, other than those referred to in number 1);

b) financial holding companies: the entities that exclusively or prevalently carry out the acquisition of shareholdings in financial intermediaries;

THE ATAD DIRECTIVES

c) non-financial holding companies and similar:

i.the entities that exclusively or prevalently carry out the acquisition of shareholdings in entities other than financial intermediaries;

ii. the entities that perform activities that are not directed towards the public, pursuant to art. 3, paragraph 2, of the regulation issued on the subject of financial intermediaries to implement articles 106, paragraph 3, 112, paragraph 3 and 114 of Legislative Decree no. 385, cited above, as well as art. 7-ter, paragraph 1-bis, Law 30 April 1999, no. 130.

43 E.g. banks, financial companies that control banks or group of banks, mixed financial holding companies, stock broking companies, asset management companies.

3 ITALIAN IMPLEMENTATION OF THE ATAD ANTI-HYBRID RULESItalian Legislative Decree 29 November 2018 no. 142 (ATAD Implementing Decree) implemented in Italy the EU Directive 2016/1164 of July 12, 2016 (ATAD) as amend-ed by the EU Directive 2017/952 of May 29, 2017 as regards hybrid mismatches with third countries (ATAD II). ATAD Implementing Decree was published in the Italian Official Gazette on December 28, 2018 and entered into force on January 12, 2019.

Articles 9, 9a and 9b of ATAD introduced anti-hybrid provisions. Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or financial instrument under the laws of two or more tax jurisdictions to achieve double non-taxation. The 2015 final report of Action 2 of the OECD/G20 BEPS project provided recommendations regarding the design of domestic rules that would neutralise the tax effects of hybrid mismatch arrangements.

As regards hybrid mismatches, the objective of ATAD is to implement the OECD recommendations in the EU Member States in a coordinated way. Under theanti-hybrid rules, in order to avoid double non-taxation derived by hybrid mismatches, Member States have the obligation to deny the deduction of a payment by a taxpayer or to require the taxpayer to include a payment or a profit in its taxable income, as the case may be.

Articles from 6 to 11 of ATAD Implementing Decree introduced in Italy hybrid mismatch rules in line with ATAD and the conclusions of Action 2 of the OECD/G20 BEPS project (Italian Anti-Hybrid Rules). Such provisions will apply from January 1, 2020 except for the reverse hybrid mismatches rule which will be applicable from January 1, 2022.

The explanatory report of ATAD Implementing Decree makes explicit reference to recital 28 of ATAD II, which states that explanations and examples in the 2015 OECD BEPS report on Action 2 (BEPS Action 2 Report) can be utilized as a source of interpretation to the extent that they are consistent with the provisions of the Direc-tive, highlighting that the mentioned OECD report has a primary role also in the interpretation of the Italian Anti-Hybrid Rules.

This section analyses the Italian Anti-Hybrid Rules illustrating the scope (paragraph 3.1), the rules (paragraph 3.2), the exclusions (paragraph 3.3), the role of Italy in their application (paragraph 3.4), the hybrid mismatches covered (paragraph 3.5), the impact on investment funds (paragraph 3.6) and providing for some conclusions (paragraph 3.7).

19


Italian Anti-Hybrid Rules introduced by ATAD Implementing Decree apply to the extent their subjective, objective and territorial requirements are met.

SUBJECTIVE SCOPE

Article 6(1)(t) of ATAD Implementing Decree provides that anti-hybrid rules apply to tax-payers subject to income tax in Italy on their business income (Italian Taxpayer).

In particular, they apply to: • resident companies; • resident entities carrying out business activities; • permanent establishments located in Italy of non-resident companies or entities;• resident partnerships carrying out business activities; • individuals carrying out business activities.

It has to be pointed out that the scope of the Italian Anti-Hybrid Rules is broader than the one of the ATAD, the latter being applicable only to taxpayers that are subject to corporate income tax in a Member State. Indeed, Italian Anti-Hybrid Rules cover all taxpayers subject to income tax in Italy on their business income, including individuals. The explanatory report of ATAD Implementing Decree highlights that the rationale behind such extension is due to the fact that anti-tax avoidance rules introduced in Italy (e.g. general anti-abuse rule and CFC rule) apply to all Italian Taxpayers deriving business income, while according to ATAD the general anti-abuse rule and CFC rule apply only to taxpayers subject to corporate income tax in a Member State. In any case, the extended scope of Italian Anti-Hybrid Rules seems compliant with article 3 of ATAD, which provides that the directive shall not preclude the application of domestic provisions aimed at safeguarding a higher level of protection for domestic corporate tax bases.


Article 6(2)(c) of the ATAD Implementing Decree, in line with ATAD, limits the subjective scope of the Italian Anti-Hybrid Rules only to hybrid mismatches that arise between associated enterprises, between a taxpayer and an associated enterprise, between the head office and permanent establishment, between two or more permanent establishments of the same entity or under a structured arrangement.

The definition of associated enterprise is provided by article 6(1)(u) of the ATAD Implementing Decree, which includes:

• an entity in which the Italian Taxpayer holds directly or indirectly a participation in terms of voting rights or capital ownership of 50% or more or is entitled to receive 50% or more of the prof-its of that entity;

• an individual or entity which holds directly or indirectly a participation in terms of voting rights or capital ownership in an Ital-ian Taxpayer of 50% or more or is entitled to receive 50% or more of the profits of the Italian Taxpayer;

• an entity which is a member of the same consolidated group of the Italian Taxpayer for financial accounting purposes;

• an enterprise in which the Italian Taxpayer has a dominant influence in the management44;

• an enterprise which has a dominant influence in the management of the Italian Taxpayer45.

In addition, according to article 6(3) of the ATAD Implementing Decree, if an individual or entity holds directly or indirectly a participation of 50% or more in a Italian Taxpayer and one or more entities, all the entities concerned, including the Italian Taxpayer, shall also be regarded as associated enterprises.

In case of hybrid financial instrument, the 50% threshold indicated above is reduced to 25%, pursuant to article 6(4) of the ATAD Im-plementing Decree.

For the purposes of the associated enterprise definition, voting rights or capital ownership of persons acting together shall be aggregated. Indeed, in line with ATAD, article 6(5) of the ATAD Implementing Decree states that a person who acts together with another person in respect of the voting rights or capital ownership of an entity shall be treated as holding a participation in all of the voting rights or capital ownership of that entity that are held by the other person. The “acting together” concept is not defined neither by the ATAD Implementing Decree nor by the explanatory report of such decree, thus, reference should be made to the OECD BEPS report on Action 2 (which is explicitly mentioned in the explanatory report of ATAD Implementing Decree).

OBJECTIVE SCOPE

ATAD Implementing Decree addresses the following categories of hybrid mismatches:• hybrid financial instrument, pursuant to article 6(1)(r)(1);• payment to a hybrid entity, pursuant to article 6(1)(r)(3); • payment to an entity with one or more permanent establishments, pursuant to article 6(1)(r)(4);• payment to a disregarded permanent establishment, pursuant to article 6(1)(r)(5);• payment by a hybrid entity, pursuant to article 6(1)(r)(6);• payment between the head office and permanent establishment or between two or more permanent establishments, pursuant to article 6(1)(r)(7);• double deduction outcome, pursuant to article 6(1)(r)(8);• imported hybrid mismatches, pursuant to article 8(3);• reverse hybrid mismatches, pursuant to article 9;• dual residency mismatches, pursuant to article 10.

ATAD Implementing Decree targets only hybrid mismatches that lead to one of the three following outcomes:

•payments that give rise to a deduction / non-inclusion outcome (D/NI outcome), meaning payments that are deductible under the rules of the payer jurisdiction and are not included in the ordinary income of the payee. ATAD Implementing Decree specifies that the payee jurisdiction is any jurisdiction where the payment is received or is deemed to be received under the laws of any other jurisdiction;

• payments that give rise to a double deduction outcome (DD outcome), meaning payments that give rise to two deductions in respect of the same payment, one in the jurisdiction of the payer and the other in the jurisdiction of the investor. In case the payment is made by a hybrid entity or by a permanent establishment, ATAD Implementing Decree specifies that the payer jurisdiction is the jurisdiction where the hybrid entity or the permanent establishment is established;

• payments that give rise to an indirect deduction / non-inclusion (indirect D/NI outcome), meaning payments that are deductible in the hands of the Italian Taxpayer making the payments and that are set-off by the payee against a deduction under a hybrid mismatch arrangement.

In addition, the explanatory report of ATAD Implementing Decree clarifies that the hybrid mismatches targeted by the Italian Anti-Hybrid Rules are only those that give rise effectively and not just potentially to one of the three outcomes described above.

TERRITORIAL SCOPE

Italian Anti-Hybrid Rules cover cross-border hybrid mismatches where one of the parties involved is an Italian Taxpayer. On the other hand, as indicated in the explanatory report of ATAD Implementing Decree, domestic mismatches are neutralized through the Italian general anti-abuse rule.

44 In relation to the definition of dominant influence, reference has to be made to article 2359 Italian Civil Code.45 See footnote no. 1.

3.1 SCOPE OF ITALIAN ANTI-HYBRID RULES


In line with ATAD II, articles 8(1) and 8(2) of ATAD Implementing Decree provides for two general rules to counteract double deduction outcome and deduction non-inclusion outcome respectively.

According to article 8(1) of ATAD Implementing Decree, if a hybrid mismatch results in a double deduction, as a primary rule, the deduction shall be denied in Italy if it is the investor jurisdiction. As a defensive rule, where the deduction is not denied in the investor jurisdiction, the deduction shall be denied in Italy if it is the payer jurisdiction.

According to article 8(2) of ATAD Implementing Decree, if a hybrid mismatch results in a deduction without inclusion, as a primary rule, the deduction shall be denied in Italy if it is the payer jurisdiction. As a defensive rule, where the deduction is not denied in the payer jurisdiction, the payment (more precisely, the amount of the payment that would otherwise give rise to a mismatch outcome) shall be included in income in Italy if it is the investor jurisdiction.

In addition, ATAD Implementing Decree provides for specific anti-hybrid rules to counteract imported hybrid mismatches, reverse hybrid mismatches and dual residency mismatches.


The explanatory report of ATAD Implementing Decree specifies that also benefits from the notional interest deduction implemented by foreign jurisdictions do not lead to hybrid mismatches.

HYBRID FINANCIAL INSTRUMENT

According to article 6(1)(r)(1) of ATAD Implementing Decree, a hybrid mismatch arrangement occurs in relation to a payment under a financial instrument or a hybrid transfer if the following conditions are met:

• such payment gives rise to a deduction without inclusion outcome;

• such payment is not included by the jurisdiction of the payee in a tax period that commences within twelve months of the end of the payer’s tax period in which the payment was deducted (Twelve-Month Period); • the mismatch outcome is attributable to the different characterisation of the financial instrument (or the payment made under it) in the payer and in the payee jurisdictions.

RULES

Since the hybrid mismatch gives rise to a deduction without inclusion outcome, according to article 8(2) of the ATAD Implementing Decree:

• if Italy is the payer jurisdiction, it denies the deduction of the payment in the hands of the payer, unless the mismatch is neutralized in another Country. In order to avoid double taxation, if Italy denies the deduction under this rule and the payee jurisdiction46 includes the payment in the ordinary income of the payee after the Twelve-Month Period, Italy will allow the deduction (previously denied) in the hands of the payer;

• if Italy is the payee jurisdiction, it includes the payment (more precisely, the amount of the payment that would otherwise give rise to a mismatch outcome) in the ordinary income of the payee, unless the deduction is denied in the payer jurisdiction or the mismatch is neutralized in another Country.

3.2 ITALIAN ANTI-HYBRID RULES

3.3 EXCLUSIONS FROM ITALIAN ANTI-HYBRID RULES

ATAD Implementing Decree provides for the following specific exclusions.

According to article 6(2)(d), differences in taxable income that are attributable to differences in the value ascribed to a payment, including through the application of transfer pricing, do not fall within the scope of a hybrid mismatch.

In addition, according to article 6(2)(e), benefits from the Italian notional interest deduction (so called ACE) do not give rise to hybrid mismatches.

3.4 ROLE OF ITALY IN APPLYING ITALIAN ANTI-HYBRID RULES

In order to neutralise the effects of hybrid mismatches, anti-hybrid rules require a response from either the payer jurisdiction or the payee jurisdiction or the investor jurisdiction, as the case may be.

According to article 7 of ATAD Implementing Decree, Italy qualifies:

• as the payer jurisdiction, if the payment is deductible in the hands of an Italian Taxpayer;

• as the investor jurisdiction, if the payment made by a non-resident (or by a foreign permanent establishment of an Italian Taxpayer) is attributed to an Italian Taxpayer and it is deductible in its hands;

• as the payee jurisdiction, if the payer jurisdiction qualifies an Italian Taxpayer as payee.

3.5 HYBRID MISMATCHES COVERED BY ITALIAN ANTI-HYBRID RULES

As indicated above, ATAD Implementing Decree addresses several categories of hybrid mismatches, which will be analysed on the next page.

46 The denial of the deduction in the payer jurisdiction shall result either from a declaration of the payer or from certain and precise elements.47 Article 27-bis of Presidential Decree 29 September 1973 no. 600 implemented in Italy the Parent-Subsidiary Directive.

It has to be pointed out that a hybrid financial instrument could potentially falls in the scope of both ATAD II and the Parent-Subsidiary Directive47. In such a case, according to recital no. 30 of ATAD II, the Parent-Subsidiary will prevail leading to an opposite result. Indeed, while the primary rule under ATAD II provides for a denial of the deduction in the payer jurisdiction, article 4(1)(a) of the Parent-Subsidiary Directive provides for a taxation in the hands of the payee parent company to the extent that the profits are deductible by the subsidiary.

EXCEPTIONS

A payment under a financial instrument or a hybrid transfer does not give rise to a hybrid mismatch where the non-inclusion in the payee jurisdiction is solely due to (i) the tax status of the payee or (ii) the fact that the instrument is held subject to the terms of a special tax regime.

In order to interpret the two exceptions indicated above, reference can be made to BEPS Action 2 Report, which is explicitly mentioned both by recital 28 of ATAD II and by the explanatory report of ATAD Implementing Decree.

As explained by BEPS Action 2 Report, paragraph 96, the hybrid financial instrument rule does not apply to mismatches that are solely attributable to the tax status of the taxpayer. Where, however, the mismatch can also be attributed to the tax treatment of the instrument (i.e. the mismatch would have arisen even in respect of payment between taxpayers of ordinary status) the hybrid financial instrument rule will continue to apply. Example 1.5 of BEPS Action 2 Report illustrates the application of this principle:

A Co

B Co

LoanInterest

C Co

A CoInterest / Dividend

Loan

B Co


“a deductible interest payment is made to a sovereign wealth fund that is a tax-exempt entity under the laws of its own jurisdiction. The rule will not apply if the tax-exempt status of the fund is the only reason for the D/NI outcome. If the hybrid financial instrument rule would ordinarily apply to such an instrument, however, then it will continue to apply and may result in a denial of a deduction for an amount paid under the arrangement”.

In addition, as explained by BEPS Action 2 Report, paragraph 97, the hybrid financial instrument rule does not apply to mismatches that are solely attributable to the special tax regime under which an instrument is held. The application of this principle is illustrated by Example 1.8 of BEPS Action 2 Report, where the payee holds the financial instrument through a foreign branch: “The fact that the loan is held through a foreign branch is not a term of the instrument or part of the relationship between the parties. Therefore, if the mismatch arises solely due to the operation of the branch exemption in the residence country then the mismatch will not be a hybrid mismatch”.

EXAMPLE

Here below an example of a hybrid mismatch deriving from a hybrid financial instrument which is line with Example 1.1 of BEPS Action 2 Report and it is also mentioned by the explanatory report of ATAD Implementing Decree.

A Co (a company resident in Country A) owns all the shares in B Co (a company resident in Country B). A Co lends money to B Co. The loan is treated as a debt instrument under the laws of Country B but as an equity instrument (i.e. a share) under the laws of Country A. Interest payments on the loan are treated as a deductible expense under Country B law but as exempt dividends under Country A law.


The interest payment described in the example falls within the scope of the hybrid financial instrument rule.

If Italy is Country B, it denies B Co the deduction for the interest paid to A Co, unless the mismatch is neutralized in another Country. In order to avoid double taxation, if Italy denies B Co the deduction and Country A includes the payment in the ordinary income of A Co after the Twelve-Month Period, Italy will allow B Co the deduction (previously denied).

If Italy is Country A, it includes the payment in the ordinary income of A Co, unless the deduction is denied in Country B48 or the mismatch is neutralized in another Country.

PAYMENT TO A HYBRID ENTITY The ATAD Implementing Decree defines “hybrid entity” as any entity or arrangement that for income tax purposes is regarded as an opaque entity (i.e. a taxable entity) under the laws o

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